In 2010, the Ninth Circuit held in Cumbie v. Woody Woo, Inc., that an employee’s property right to tips attaches under the FLSA only if the employer is taking a tip credit pursuant to 29 U.S.C. § 203(m). In response to this decision the Department of Labor passed widely discussed-regulations which, contrary to the decision, purport to vest employees with statutory rights to tips under the FLSA, notwithstanding whether a tip credit is taken. On Friday, as part of a challenge to the DOL’s rulemaking process giving rise to those regulations brought by the Oregon Restaurant and Lodging Association, Judge Michael W. Mosman of the District of Oregon ruled that the DOL’s regulations are invalid and should not be granted deference because they contradict settled precedent under Woody Woo, and are inconsistent with the language of the FLSA. Or. Rest. & Lodging v. Solis, 2013 U.S. Dist. LEXIS 80396 (D. Or. 2013).

The court analyzed the validity of the DOL’s post-Woody Woo rulemaking under the framework for analysis of regulatory action set forth in Chevron U.S.A. Inc. v. NaturalResources Defense Council, Inc., 467 U.S. 837 (1984). Applying the Chevron analysis, Judge Mosman stated that the Ninth Circuit (which encompasses Oregon) in Woody Woo “based on the clear and unambiguous text of the statute . . . found that Congress intended only to limit the use of tips by employers when a tip credit is taken. This is not silence. This is repudiation. Therefore, I find that Woody Woo leaves no room for agency discretion here.” (emphasis in original). As a separate basis for invalidating the regulations, the court also found that the Section 3(m)’s “silence” – in not creating a rule for tip distribution in the absence of a tip credit – did not constitute a legislative “gap” for the DOL to fill, but rather Congressional intent not to regulate tips under those circumstances and let the marketplace dictate behavior.

“We are pleased that Judge Mosman recognized the shortcomings in the DOL’s rulemaking here,” stated Jackson Lewis Wage-and-Hour Practice Group leader and former DOL Wage-and-Hour Administrator, Paul DeCamp, lead counsel for the plaintiffs in the Oregon litigation. “The restaurant and hospitality industries have long faced an array of regulations imposed by numerous agencies, so tacking on additional restrictions that are contrary to established case law is especially unfair.”

DeCamp added that he believes a Departmental appeal to the Ninth Circuit is likely. This decision is a victory for the employer community, but until the likely Ninth Circuit decision that will come in the future, employers should remain cautious vis-à-vis tip distribution even if a tip credit is not being taken. It also remains important, as always, to confirm compliance with state law before implementing any wage-and-hour practice.

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